To: Directors, Business

Directors, Human Resources From: Gary Stine, MPA

Director, Support Services Date: February 5, 2013 Subject: Clarification on 180-day Waiting Period

Public Employees’ Pension Reform Act of 2013 Since the passing of the Public Employees’ Pension Reform Act (PEPRA) in September 2012, districts have received a plethora of information, different interpretations, and possible direction from a number of sources on how the provisions of PEPRA would be implemented. One provision which may have caused confusion concerns the employment of retired annuitants and the 180-day waiting period prescribed in PEPRA. The purpose of this memorandum is to clarify the requirements of this provision. CalSTRS has been consistent in their direction in which only members whose most recent retirement was on or after January 1, 2013 would fall under the 180-day waiting period. CalPERS was unable to provide clear guidance on the issue until several weeks after the law was enacted. Initial thoughts were that that the 180-day waiting period would apply to all retired annuitants. After receiving input from public agencies, CalPERS revised their interpretation and decided that only retirees who start work prior to January 1, 2013 are exempted from the PEPRA 180-day waiting period. Under both pension systems, if a member received a retirement incentive in any form, the 180-day waiting period is mandatory. There are a few narrow exemptions to these rules which require districts to follow a prescribed course of action, certification by local boards, and approval from CalPERS or CalSTRS. We apologize for any confusion that may have occurred as a result of the barrage of pension reform updates that have been distributed. The latest directives from CalSTRS and CalPERS have been attached to this memo for your reference. Please contact Gary Stine at gstine@ocde.us or (714) 966-4253 if you have any questions or if we may be of further assistance. Cc: Assistant Superintendents, Business Assistant Superintendents, HR Vice Chancellors, Business

Vice Chancellors, Human Resources

California Public Employees’ Retirement System P.O. Box 942709 Sacramento, CA 94229-2709 Reference No.: (888) CalPERS (or 888-225-7377) Circular Letter No.: 200-055-12 TTY: (877) 249-7442 Distribution: IV, V, VI, X, XII, XVI www.calpers.ca.gov Special:

Circular Letter

December 3, 2012

TO: ALL CALPERS EMPLOYERS

SUBJECT: IMPLEMENTATION OF PUBLIC EMPLOYEES' PENSION REFORM ACT OF 2013

The purpose of this Circular Letter is to confirm CalPERS current interpretation of the Public Employees’ Pension Reform Act of 2013 (PEPRA) and related Public Employees’ Retirement Law (PERL) amendments in Assembly Bill (AB) 340, passed by the California Legislature on August 31, 2012, and signed by the Governor on September 12, 2012. Recent news about the enactment of pension reform has generated increased attention and questions from our employers, members, and stakeholders. We created this Circular Letter to provide a summary of the provisions outlined in the bill as they apply to CalPERS retirement and health benefits. We also include information on my|CalPERS system modifications and explain what actions employers need to take to comply with the new provisions that change how they do business with CalPERS. This Circular Letter is not intended to provide a comprehensive summary of PEPRA and related law changes. The current interpretations discussed below address the key areas of the bill that may directly affect CalPERS interactions with our members and employers. Our pension reform team continues to analyze PEPRA provisions and the resulting impacts. As CalPERS moves ahead with implementing PEPRA and related amendments to the PERL, our interpretations may be revised. CalPERS strongly recommends that all employers review AB 340 in its entirety to understand how the changes in law will affect their organization and employees. MEMBERSHIP AND BENEFIT FORMULAS Definition of a New Member A new member is defined in PEPRA as any of the following:

• A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who has no prior membership in any California public retirement system.

• A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who is not eligible for reciprocity with another California public retirement system.

Circular Letter No.: 200-055-12 December 3, 2012 Page 2

• A member who first established CalPERS membership prior to January 1, 2013, and who is rehired by a different CalPERS employer after a break in service of greater than six months.

Effective January 1, 2013, every new enrollment will be tested against this definition of “new member”, regardless of whether the enrollment is for a first-time CalPERS member or an existing CalPERS member. It is important to note that if a member has a break in service of more than six months but returns to service with the same employer, the member would not be considered a new member under PEPRA. All State agencies, including CSU, are treated as a single employer under PEPRA, as are all school employers. CalPERS refers to all members that do not fit within the definition of a new member as “classic members”. All existing CalPERS members as of December 31, 2012, will retain the existing benefit levels for future service with the same employer. Because the new member determination is made on an appointment-by-appointment basis, classic members will be tested against the “new member” definition upon each new appointment and, in some cases, may become “new members” for services under a new appointment. PEPRA does not require retroactive reductions to benefits earned for prior service, even where a member separates from service and is later re-hired as a new member by a new employer and becomes subject to the applicable PEPRA formula. In these cases, the member’s “classic member” service will be calculated separately from his or her service as a “new member”. CalPERS will develop a form for employers to use when a member hired by a CalPERS agency is considered a classic member as a result of membership with a previous reciprocal retirement system. Employers must complete the form and retain it in the individual’s employment records for auditability purposes. my|CalPERS will be updated to include fields on the enrollment page where employers will identify if the new hire is coming from a reciprocal agency and prompt the employer for the necessary data elements which subject them to reciprocity. It will be extremely important for employers to properly identify the status of members at the time of hire. Based on the information provided by the employer, my|CalPERS will automatically determine the proper benefit group for each member. In addition, CalPERS will create for each employer a report identifying their recent enrollments and the correct corresponding formula based on the information provided at enrollment. If an employer believes the enrollment is incorrect, they may contact CalPERS to review and correct the data as necessary. Employers must store, in their own databases, the participant details necessary to categorize individuals as new members or classic members. Important! These system enhancements are not yet available. All member enrollments with an effective date of January 1, 2013, or later should be held until employers receive notification that the transaction may be processed.

Circular Letter No.: 200-055-12 December 3, 2012 Page 3 Throughout the upcoming months, CalPERS will create and/or update forms and publications to assist employers with enrollment transactions for new members. A Circular Letter will be sent to employers as those resources become available. Benefit Formulas The reduced benefit formulas and increased retirement age provisions under PEPRA create new defined benefit formulas for all new miscellaneous (non-safety) and safety members. For new safety members, the law provides for three possible retirement formulas and requires that new safety members be provided with the new formula that is closest to the formula offered to classic members of the same classification and that provides a lower benefit at 55 years of age than the formula offered to classic members. The three new defined benefit formulas for new safety members include a normal retirement age of 50 and a maximum benefit at age 57. For all new miscellaneous members, with the exception of State Tier II, the new defined benefit formula is 2% at age 62, with an early retirement age of 52 and a maximum benefit factor of 2.5% at age 67. For State Tier II members, the new formula is 1.25% at age 67. Please refer to the tables below to see how the reduced benefit formulas compare to current formulas.

Current Miscellaneous Formula New Miscellaneous Formula 1.5%@65 1.5%@65 (retain existing formula) 1.25%@65 1.25%@67 All others 2%@62

Current Safety Formula New Safety Formula

3%@50, 3%@55, 2%@50 2.7%@57 2.5%@55 2.5%@57 2%@55, 2.5%@60, ½@55 2%@57

The new formulas will be implemented in my|CalPERS to take effect on January 1, 2013. The legislatively mandated formulas and provisions will be merged with the employer’s existing optional provisions, with some exceptions, effective on December 31, 2012, to create the new benefit groups. No formal contract amendments are necessary to implement the new mandated benefit groups. CalPERS will work with employers to update the employer’s contract(s) either at the time of a future amendment or as soon as practicable. CalPERS estimates that it will take approximately two years to complete this update process for all employers.

Circular Letter No.: 200-055-12 December 3, 2012 Page 4 EMPLOYER AND MEMBER CONTRIBUTIONS Normal Cost Contributions For public agencies, school employers, CSU, and the judicial branch, a new member’s initial contribution rate will be at least 50% of the total normal cost rate for their defined benefit plan or “the current contribution rate of similarly situated employees, whichever is greater”, except where it would cause an existing Memorandum of Understanding (MOU) to be impaired. If an employer determines that an existing MOU is impaired, and communicates that decision to CalPERS using the required certification form, then any otherwise impaired contribution rate agreement will apply to new members through the duration of the MOU. Once the impaired MOU is amended, extended, renewed, or expires, the new requirements will apply. CalPERS interprets “similarly situated members” to mean those employees that are in the same benefit group (meaning those employees with the same benefit formula). The member contribution rate is not required to change for classic members of a public agency or school district. State employees, including both classic and new members (excluding new CSU members and new judicial branch members), will pay the statutory rates determined through bargaining and provided for by statute. See Proposed Changes in Member Contribution Rates for State Employees for changes that PEPRA imposes on State member contributions available on CalPERS On-Line. CalPERS will be sending a letter to each employer this month outlining the benefit formula applicable to new members, as well as the employer and member contribution rates that will be effective January 1, 2013, for new members. For classic members, employers should refer to the June 30, 2011 actuarial valuation report that was mailed in November 2012 to determine what amount reflects 50% of the total normal cost for classic members. In addition, a new report will be added in my|CalPERS that will identify member and corresponding member rates by group and plan. The Appointment Details and Events page in my|CalPERS will also display the appropriate contribution rates for members. Beginning January 1, 2018, public agencies that have collectively bargained in good faith and completed impasse procedures (including mediation and fact-finding) will be able to unilaterally require classic members to pay up to 50% of the total normal cost of their pension benefit. It is important to note that the employee contribution may only be increased up to an 8% contribution rate for miscellaneous members, a 12% contribution rate for local police officers, local firefighters, and county peace officers, or an 11% contribution rate for all other local safety members. Cost Sharing of Employer Contributions Some public agencies have amended their CalPERS contract to have their members pay a portion of the employer’s contribution. These contributions are paid in addition to the member contribution rate. Under existing law, such employer cost sharing contract amendments were required to be tied to a benefit improvement. This requirement will be eliminated as of January 1, 2013, when the new amendments to the PERL go into

Circular Letter No.: 200-055-12 December 3, 2012 Page 5 effect. In addition, under the new law, cost sharing agreements may differ by bargaining unit or for classifications of employees subject to different benefit levels as agreed to in an MOU. The new law also permits cost sharing of the employer costs for non-represented employees as approved in a resolution passed by the public agency. Employer Paid Member Contributions (EPMC) PEPRA prohibits EPMC for new members, employed by public agencies, school employers, the judicial branch, or CSU, unless an employer’s existing MOU would be impaired by this restriction. It is up to each employer to determine if an MOU would be impaired by this restriction on EPMC for new members. The impaired MOU must have an effective date of January 1, 2013, or earlier. If the employer determines that an existing MOU is impaired, then any stated EPMC agreements will apply to new members through the duration of the MOU. CalPERS must receive the full required member contributions, regardless of the amounts paid by the member or the employer. Once the impaired MOU is amended, extended, renewed, or expires, EPMC will no longer be permitted for new members. CalPERS will implement a manual validation procedure to ensure EPMC is not being reported on payroll for new members. Employers must notify CalPERS in writing if they determine that their MOU is impaired and provide a certification to CalPERS, signed by the agency’s presiding officer, confirming that application of Section 7522.30(c) of PEPRA would cause an existing MOU to be impaired. CalPERS will provide a form to employers for this certification. More information on the certification and the form will be sent to employers in a future Circular Letter. EPMC may continue to be reported for classic members pursuant to existing PERL provisions. Employers who wish to eliminate or reduce EPMC for classic members are able to do so under existing law through collective bargaining and contract amendments. Existing PERL statutes allow employers to periodically increase, reduce or eliminate employer paid member contributions. Pension Holiday The combined employer and member contributions required, in any fiscal year, cannot be lower than the total year’s normal cost. Some employers currently have a surplus in their plan and presently pay less than the total normal cost. CalPERS will review each employer in this category and determine whether this provision must be implemented at the start of the next fiscal year. A letter will be sent to affected employers notifying them of their required contribution amounts. PENSIONABLE COMPENSATION Compensation Caps This provision caps the annual pensionable compensation that can be used to calculate final compensation for new members.

Circular Letter No.: 200-055-12 December 3, 2012 Page 6 Presently, there is a compensation cap in place for first-time members hired after January 1, 1996. The compensation cap is set by the Internal Revenue Service and is referred to as the 401(a)(17) limit. CalPERS will continue to cap contributions for affected classic members at the 401(a)(17) limit. New member contribution caps are effective January 1, 2013. The new member cap for 2013 will be $113,700 (100% of the 2013 Social Security contribution and benefit base) for members that participate in Social Security or $136,440 (120% of the 2013 contribution and benefit base) for those employees that do not participate in Social Security. Adjustments to the caps are permitted annually based on changes to the Consumer Price Index for All Urban Consumers. Employers will report full pay rate and actual earnings for all members in my|CalPERS and the system will flag and notify the employer when the contribution limit has been reached for that calendar year. Member contributions must stop when the member’s actual earnings reach the contribution limits outlined above. Note that this does not necessitate a change to your file formatting structure; rather it is related to how employers track and report payroll. Reporting up to the compensation cap for new members will occur in the same manner it does currently for classic members subject to the 401(a)(17) limit. Currently, CalPERS does not cap employer contributions at the 401(a)(17) limit and we do not intend to cap employer contributions at the PEPRA limits for at least the next two years. We are conducting further analysis to determine if employer contributions will be capped beginning with the 2015/2016 fiscal year. We will share the new information with you in a future Circular Letter once a final decision has been made. Three-Year Final Compensation PEPRA requires that a three-year final compensation period be used to calculate the average final compensation for a retirement calculation for all new members. Some employers, including the State, already provide for a three-year final compensation period. Public employers are also prohibited from adopting a final compensation period of less than three years for classic members who are currently subject to three-year final compensation. Pensionable Compensation PEPRA introduces a new term “pensionable compensation” for the purposes of determining reportable compensation for new members. PEPRA broadly defines pensionable compensation, and while it specifically excludes some forms of compensation, it does not clearly identify which forms of pay fall within the scope of pensionable compensation. CalPERS is evaluating what forms of compensation are considered as pensionable compensation and how they should be reported. We will update employers on this issue in a future Circular Letter that we anticipate will be sent later this month.

Circular Letter No.: 200-055-12 December 3, 2012 Page 7 Excessive Compensation This new PERL provision requires the CalPERS Board to “define a significant increase in actuarial liability due to increased compensation paid to a non-represented employee”. The Board is further directed to implement program changes to ensure that a public agency that creates a significant increase in actuarial liability bears the increased cost associated with that liability. CalPERS will develop the program changes necessary to assess the cost of excessive compensation to the employer that paid the excessive compensation. This provision will apply to any significant increase in actuarial liability that is determined after January 1, 2013, regardless of when excessive compensation was paid. CalPERS is working to develop the program changes and definitions necessary to administer these provisions and anticipates promulgating regulations to address these new requirements. Updates on this issue will be provided to employers in a future Circular Letter. WORKING AFTER RETIREMENT PEPRA includes two provisions applicable to working after retirement. These provisions include restrictions, including, but not limited to:

• All employees who retire from public service will be prohibited from working more than 960 hours per calendar or fiscal year for any public employer in the same public retirement system that the individual is retired from without reinstating from retirement.

• A 180-day waiting period is required for all employees who retire from a public employer before a retiree can return to work without reinstating from retirement, except under certain specified circumstances. The 180-day waiting period starts from the date of retirement.

• Any public retiree appointed to a full-time position on a State board or commission will be required to suspend their retirement allowance and become an active member of CalPERS, unless the appointment is non-salaried.

As currently required, employers must continue to report in my|CalPERS all the hours worked by any CalPERS retired annuitant in order to monitor the 960-hour cap per fiscal year. CalPERS retirees who are hired as independent contractors or consultants with a direct relationship, for purposes of this section, are considered retired annuitants and must also be reported and tracked in my|CalPERS. The 180-day waiting period provision applies without exception to retirees who receive either a golden handshake or some other employer incentive to retire. Retired annuitants who started working before January 1, 2013, are not impacted by the 180-day waiting period. my|CalPERS plans to validate the 180-day waiting period for all new enrollments and will flag any potential violations of this waiting period for additional review. Potential violations will not prohibit the online my|CalPERS enrollment; however, when enrolling a retiree under the certification-resolution exception to the 180-day waiting period, the

Circular Letter No.: 200-055-12 December 3, 2012 Page 8 employer must submit a copy of the certification-resolution to CalPERS. The rest of the enrollment process will remain the same as today. PENSION AND HEALTH BENEFIT CHANGES Industrial Disability Retirement (IDR) Benefits In addition to the current calculation options of the IDR benefit for a member, this provision adds a calculation for a safety member who qualifies for an IDR that may result in a higher benefit than 50% of salary. An actuarial reduced retirement formula, as determined by the actuary for each quarter year of service age less than 50, will be used to determine if the IDR benefit is greater for the safety member who qualifies for IDR. These provisions remain in effect only until January 1, 2018. After that date, the new IDR provisions will not apply unless the date is extended by statute. Retroactive Pension Benefit Enhancements Public employers will be prohibited from granting retroactive pension benefit enhancements that would apply to service performed prior to the operative date of the enhancement. An increase to a retiree’s annual cost-of-living adjustment within existing statutory limits is not considered to be an enhancement to a retirement benefit. CalPERS will develop a list of those existing optional benefits that are considered to be retirement benefit enhancements and therefore subject to this restriction. CalPERS also plans to promulgate a regulation interpreting and clarifying this provision. Additional information will be sent to employers in a future Circular Letter. Replacement Benefit Plans PEPRA prohibits public employers from providing new employees a plan of replacement benefits to supplement retirement benefits that are limited by Internal Revenue Code Section 415(b). This provision also prohibits public employers from offering a replacement benefit plan to any employee group that was not provided this benefit prior to January 1, 2013. CalPERS will continue to offer replacement benefit plans for classic members not impacted by this provision. Health Benefit Vesting Schedule This provision generally prohibits employers from providing a more advantageous health benefit vesting schedule to certain individuals (namely a public employee who is elected or appointed, a trustee, excluded from collective bargaining, exempt from civil service, or a manager) than it does for other public employees, including represented employees, of the same public employer who are in related retirement membership classifications. In the event that bargaining groups under one employer have established different vesting schedules, the non-represented employees must align with the least advantageous of the groups in related membership classifications, such as State miscellaneous.

Circular Letter No.: 200-055-12 December 3, 2012 Page 9 If an employer has established tiered vesting schedules based upon date of hire, then all non-represented employees must be subject to the same tiered vesting schedules as represented employees of the same membership classifications. Additional Retirement Service Credit (ARSC) The ability to purchase non-qualified service, or “airtime”, will be eliminated on January 1, 2013. An official application must be submitted and stamped as received by CalPERS on or before December 31, 2012. Only applications from individuals who qualify to purchase ARSC on or before December 31, 2012, will be accepted. CalPERS is reviewing whether other types of nonqualified service credit may be impacted by this prohibition. The prohibition on future “airtime” service credit purchases does not prohibit purchases of qualified service credit. For example, service credit purchases for qualified military service will still be allowed. Felony Forfeiture of Pension Benefits Any current or future public official or employee convicted of a felony while carrying out his or her official duties, in seeking an elected office or appointment, and/or in connection with obtaining salary or pension benefits, will be required to forfeit any pension or related benefit earned from the date of the commission of the felony. OTHER RETIREMENT PROGRAMS Alternate Retirement Program (ARP) ARP, a retirement savings program that certain State employees are automatically enrolled in for two years from their initial hire date, will be eliminated. The bill provides that all new members hired on or after July 1, 2013, will no longer be enrolled in the program. An urgency legislative amendment was introduced to change the ARP elimination date from July 1, 2013 to January 1, 2013. CalPERS will continue to monitor the bill and work with the State Controller’s Office and the California Department of Human Resources to determine how to enroll new State miscellaneous and industrial members beginning January 1, 2013. Once a process has been identified, we will notify State employers. Members currently enrolled in ARP will continue to participate in ARP pursuant to existing statutory requirements. CalPERS does not administer ARP. For program details on the ARP savings plan, contact the California Department of Human Resources at www.calhr.ca.gov. Legislative Retirement System (LRS) These provisions prohibit new members, including constitutional, statutory elected officers and the Insurance Commissioner, who assume office for the first time on or after January 1, 2013, from enrolling in LRS. Members already enrolled in LRS prior to January 1, 2013, will continue to participate in the plan until they separate or retire.

Circular Letter No.: 200-055-12 December 3, 2012 Page 10 my|CalPERS will be modified to remove LRS enrollment as an option for new members. The current process that allows new members to elect optional membership into CalPERS will not change. ADDITIONAL INFORMATION CalPERS On-Line For more information on PEPRA and how it impacts current and future CalPERS members, visit the Pension Reform Impacts page on CalPERS On-Line at www.calpers.ca.gov. This page features the latest updates regarding PEPRA including a question and answer section and links to additional resources. In addition, the video “Pension Reform: A Discussion with CalPERS Experts” highlights how pension reform impacts employers. Teleconferences CalPERS will conduct a series of teleconferences to address questions you may have relating to the information in this Circular Letter. Please register online via the Pension Reform Impacts page.

Date Time Agency Type

Dec 10 9:30 to 11:30 am Public Agency Dec 10 1:30 to 3:30 pm School Dec 11 9:30 to 11:30 am State Dec 12 9:30 to 11:30 am Public Agency Dec 13 9:30 to 11:30 am School Dec 14 9:30 to 11:30 am State

my|CalPERS Changes CalPERS will provide more detailed information regarding my|CalPERS changes in the coming weeks. Contact Us Please share this information with your employees to help answer their questions and provide additional information on the changes. If you have any questions, please call the CalPERS Customer Contact Center at 888 CalPERS (or 888-225-7377). KAREN DeFRANK, Chief Customer Account Services Division

California State Teachers’ Retirement System

P.O. Box 15275, Sacramento, CA 95851-0275

800-228-5453 | CalSTRS.com

Pension Reform Issue

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California Public Employees’ Pension Reform Act of 2013

On September 12, 2012, Governor Brown signed AB 340 (Chapter 296, Statutes of 2012), known as the California Public Employees’ Pension Reform Act of 2013. Much of the media focus has been on how pension reform affects public employees. But as you know, changes to your employees’ pension plan can mean changes in how you interact with CalSTRS.

The first step to understanding the Pension Reform Act of 2013 is to understand who is affected by each provision. The new law applies differently to employees depending on when they became employed by a CalSTRS employer. As it is currently written, the new law also applies differently to CalSTRS than it does to other public employers. However, legislation may be introduced to change this. CalSTRS will inform you of any new developments as soon as possible.

In the coming months, CalSTRS will publish e-Bulletins, SEW Announcements and Employer Directives, as well as conduct information sessions with more details, so that you will have all of the necessary information to carry out your own implementation of the new pension reform legislation.

What’s Inside …Postretirement Employment 3

Definitions of Creditable

Compensation 7

Creditable Compensation Cap 8

Contribution Rates 9

Felony Forfeitures 10

Employer Election to Offer

One-Year Final Compensation 10

Other Provisions Affecting

Members 11

Next Steps 13

PMS 179

M 79Y84

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As currently written, the Pension Reform Act of 2013 defines new and existing CalSTRS members as follows:

y New member: First hired to a position to perform CalSTRS creditable activities on or after January 1, 2013.

y Existing member: First hired to a position to perform CalSTRS creditable activities on or before December 31, 2012.

If the employee had CalSTRS creditable activities covered by another retirement plan, including Social Security, prior to 2013, or previously terminated certificated employment and CalSTRS membership prior to 2013, and is now returning, he or she is also considered an existing member.

Most of the new law applies to new members; however, the postretirement employment rules, elimination of the purchase of nonqualified service credit and impacts of felony convictions affect both new and existing members.

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Postretirement EmploymentYou may be wondering how the Pension Reform Act of 2013 affects your ability to hire retired teachers and administrators to fill staffing vacancies. The answer depends on when the member retired, regardless of when he or she was hired:

y The existing restrictions apply to current retirees and any member who retires from CalSTRS on or before December 31, 2012.

y The new restrictions apply to members who retire on or after January 1, 2013.

All of the postretirement employment restrictions apply to CalSTRS-covered employment, including any activity that would be subject to coverage by CalSTRS, regardless of whether activities are performed by an employee of the district, an independent contractor or an employee of a third party, such as a company providing services to the school employer.

Retirement On or Before December 31, 2012

A CalSTRS member who retires on or before December 31, 2012, is subject to existing postretirement earnings restrictions:

y If the retiree is under age 60, he or she must wait to return to CalSTRS-covered service in order to avoid a reduced benefit. The wait time is the shorter of:

» Six months after the retirement date, or

» The retiree’s 60th birth date.

This is known as the separation-from-service requirement. If the retired member earns any amount from CalSTRS-covered employment during that period, his or her retirement benefit will be reduced dollar for dollar by the amount earned. In addition, the retired member cannot earn more than the annual earnings limit in effect at the time. For retired members who earn more than the annual earnings limit, CalSTRS reduces their retirement benefit dollar for dollar.

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All of the postretirement employment restrictions apply to CalSTRS-covered employment, including any activity that would be subject to coverage by CalSTRS.

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y If the retiree is age 60 or older, he or she may return to CalSTRS-covered employment immediately after retirement but is restricted from earning more than the annual earnings limit in effect at the time. For retired members who earn more than the annual earnings limit, CalSTRS reduces their retirement benefit dollar for dollar.

Retirement On or After January 1, 2013

The separation-from-service requirement applies to any CalSTRS members who retire on or after January 1, 2013. A CalSTRS member who retires on or after January 1, 2013, and earns any compensation from CalSTRS-covered employment for the first 180 calendar days after their most recent retirement, regardless of age at the time of retirement, will have their benefit reduced dollar for dollar by the compensation earned.

After 180 calendar days, retired members may return to CalSTRS-covered employment, as long as they do not earn more than the annual earnings limit. For retired members who earn more than the annual earnings limit, CalSTRS reduces their retirement benefit, dollar for dollar by the excess amount.

Annual Earnings Limit

The annual earnings limit for the 2012–13 school year is $40,011. The limit is adjusted annually and is equal to 50 percent of the median final compensation for members who retired during the fiscal year ending in the previous calendar year. CalSTRS reduces the member’s retirement benefit dollar for dollar by the amount in excess of the limit.

For more information regarding the earnings limit, please refer to Employer Directive 2012–05.

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Postretirement Employment Exemptions and Exclusion

There are two narrow exemptions and one specific exclusion from these postretirement employment restrictions:

1. Exemption from the separation-from-service requirement:

For a member who retires after January 1, 2013, and who is at or above normal retirement age—age 60 for existing members and age 62 for new members—an exemption can be requested if all of the following conditions are met:

y The governing body of the employer, such as a school board, approves the appointment of the retired member through a resolution adopted at a public meeting.

y The retired member did not receive a retirement incentive or any financial inducement to retire from a public employer.

y The retired member’s termination of service, or retirement, is not the reason for the vacancy.

y The exemption request and documentation required are received by CalSTRS prior to any service being performed.

Members who meet all the above conditions and are exempted from the separation-from-service requirement are still subject to the annual earnings limit.

2. Exemption from the annual postretirement earnings limit:

For the 2012–13 and 2013–14 school years only, there is an exemption for retired members who are appointed by a county superintendent of schools, the Community Colleges Board of Governors, the State Board of Education or the State Superintendent of Public Instruction to specified positions to assist schools that are experiencing specific academic or fiscal distress.

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Documentation substantiating the need for these exemptions and the retired member’s eligibility for the exemption must be received by CalSTRS prior to any service being performed.

3. Exclusion from the postretirement earnings limit and related provisions:

There is one exclusion that allows certain retired members to perform service immediately and earn an unlimited amount without experiencing a benefit reduction. This exclusion applies to a retired member who is employed by a third party to perform, for a limited time, service not normally performed by a school employee. The third party must not participate in a California public pension system. CalSTRS has not yet identified an example where such an exclusion would apply.

For more information about these exemptions and the exclusion, refer to Employer Directive 2012-05 or email postretirement@CalSTRS.com.

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Definitions of Creditable CompensationFor new members on and after January 1, 2013, the Pension Reform Act of 2013 streamlines the types of compensation that are creditable to the Defined Benefit and Defined Benefit Supplement programs, putting them into just two categories:

1. Compensation that is regularly payable and based on a salary schedule is creditable to CalSTRS.

2. All other compensation that is not regularly payable and not based on a salary schedule is not creditable to CalSTRS.

Compensation Credited to the Defined Benefit Program

y For new members, compensation is creditable to CalSTRS if:

» It is paid regularly and based on a salary schedule that is publicly available.

» It is not an allowance, a bonus, cash in lieu of receiving a benefit, compensation that is payable for a specified number of times, or compentsation paid for the purposes of enhancing a benefit.

In other words, only compensation that is part of a CalSTRS member’s base salary is creditable, provided that the compensation does not exceed the compensation cap.

y For existing members, you should use the existing definitions of creditable compensation for reporting compensation to CalSTRS.

Compensation Credited to the Defined Benefit Supplement Program

For new members who perform more than one year of service credit in a school year by performing overtime or working additional assignments, contributions for that compensation will continue to be credited to the Defined Benefit Supplement Program provided that the compensation does not exceed the compensation cap.

One-Time, Lump-Sum Payments

One-time, lump-sum payments, such as lottery payments and community college parity pay, are not considered creditable for new members on and after January 1, 2013.

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Creditable Compensation Cap As you know, the Internal Revenue Code places limits on the amount of salary that counts towards a public defined benefit. The Pension Reform Act of 2013 establishes a new limit on compensation creditable to CalSTRS for new members, based on the Social Security wage base. As a result, the limit is different for new and existing members.

y For existing members between January 1, 1996, and December 31, 2012, the limit is $250,000, pursuant to Internal Revenue Code 401(a)(17). Existing members prior to January 1, 1996, do not have a cap applied to their compensation.

y For new members on or after January 1, 2013, the limit is 120 percent of the 2013 Social Security wage base and will be adjusted annually based on changes to the Consumer Price Index for All Urban Consumers. Beginning January 1, 2013, the compensation cap for new members is $136,440. CalSTRS will publish the cap amount as it is adjusted each year.

Employers may offer their employees a defined contribution plan for contributions on excess salary amounts. If you offer a defined contribution plan to your employees who are members of CalSTRS, the employer contribution rate cannot be greater than the rate for the Defined Benefit Program.

Employee and employer contributions to the Defined Benefit Program cannot be made on amounts in excess of these compensation limits. In addition, contributions on the excess cannot be made to the Defined Benefit Supplement Program. At this point, we do not expect changes to the employer reporting process to report compensation for your highly paid employees under the new law.

The Pension Reform Act of 2013 establishes a new limit on compensation creditable to CalSTRS for new members.

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Contribution RatesOne of the key points of the Pension Reform Act of 2013 is the equal sharing of pension costs between employees and employers.

The Pension Reform Act of 2013 requires new members on and after January 1, 2013, to pay at least half of the normal cost of pension benefits or the current member contribution rate, whichever is greater, and prohibits employers from paying contributions for new members. The employer contribution rate for new members is at least the normal cost of pension benefits minus the member contribution rate. The new law defines the normal cost rate as the annual actuarially determined normal cost for the defined benefit plan as determined by the retirement system’s actuary.

However, the Pension Reform Act of 2013 does not specify who has the authority to set contribution rates. It is not clear whether the Legislature intended to extend the authority to establish contribution rates to CalSTRS since the Teachers’ Retirement Board has not had the authority to do so in the past. Legislative staff indicate that urgency legislation will be considered early next year to clarify these provisions of the law.

Therefore, at its November meeting, the board adopted a normal cost of 15.9 percent for new members’ pension benefits based on analysis by the system’s actuary. Given the ambiguity regarding determination of new member and employer contribution rates, the board acknowledged the existing statutory contribution rates in the Teachers’ Retirement Law:

y 8 percent for members.

y 8.25 percent for employers.

Until clarifying language is developed, introduced, passed by the Legislature and signed by the Governor, the contribution rates for all existing and new members will remain at 8 percent and the employer contribution rate will remain at 8.25 percent.

Employer “Pick Up” of Member Contributions

While the Pension Reform Act of 2013 prohibits employers from paying member contributions for new members, it does continue to permit employers to “pick up” their employees’ contributions for the purposes of deferring income taxes, as provided by Internal Revenue Code Section 414(h)(2) and Revenue and Taxation Code Section 17501.

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Felony ForfeituresIf any member, existing or new, is convicted of committing a felony in the course of his or her official duties, any benefits that member accrued after committing the felony will be forfeited. Any benefits the member accrued prior to committing the felony will remain intact. Any contributions made by the member to CalSTRS after the date the felony was committed will be returned without interest.

The convicted member and the prosecuting agency are required to notify the member’s employer within 60 days of the conviction. The member and the employer are then required to notify CalSTRS within 90 days of the conviction. CalSTRS will inform employers once we have implemented a process for reporting felonies to the system.

Employer Election to Offer One-Year Final Compensation

Under the Pension Reform Act of 2013, pensions for new members must be based on final compensation averaged over at least three consecutive years.

Currently, your district can negotiate with employee organizations to provide one-year final compensation for your CalSTRS members. It is unclear whether districts will be permitted to enter new collective bargaining agreements offering one-year final compensation to existing members in the future. CalSTRS will provide additional information as it is available.

Final Compensation

y New members on and after January 1, 2013, will receive a retirement benefit based on the average of their highest salary rate over three consecutive school years, not to exceed the compensation cap.

y Existing members who meet the 25-year service credit requirement at the time of retirement will continue to be eligible for one-year final compensation.

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Other Provisions Affecting MembersThe Pension Reform Act of 2013 makes other changes that affect members. These changes do not have a significant impact on employers.

Nonqualified Service Credit

The new law prohibits the purchase of nonqualified service credit, also known as air time, for all members after 2013. In order for a member to purchase nonqualified service credit, CalSTRS must receive the appropriate CalSTRS form by 5:00 p.m. on December 31, 2012. A member must be vested in order to purchase nonqualified service credit. All other service credit purchases are still available, including the ability to redeposit previously withdrawn contributions.

Retirement Age and Career Factor

The new law makes changes to the retirement age and eliminates the career factor for new members.

y For existing members, the normal retirement age is 60 with a 2 percent age factor. The maximum age factor is 2.4 percent at age 63. The minimum age an existing member can retire is at age 55, with 5 years of service, or age 50 with 30 years of service.

Existing members retiring with 30 or more years of service may receive an increase of up to 0.2 percent in their age factor, known as the career factor, up to a maximum age factor of 2.4 percent.

y For new members on and after January 1, 2013, the normal retirement age is 62 with a 2 percent age factor. The maximum age factor is 2.4 percent at 65. The minimum age a new member can retired is at age 55 with 5 years of service.

For new members, the career factor is eliminated.

continued on page 12

In order for a member to purchase nonqualified service credit, CalSTRS must receive the appropriate CalSTRS form by 5:00 p.m. on December 31, 2012.

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Elimination of Replacement Benefits Program

Federal law limits the amount of benefits that can be paid by a qualified defined benefit plan. Federal law also allows benefits to be paid above that limit under a separate program, also known as the Replacement Benefits Program. In 2012, the federal limit applicable to a 65 year old CalSTRS member is $171,202.

The Pension Reform Act of 2013 prohibits new members from receiving any benefits from CalSTRS in excess of the federal limit, thereby eliminating the Replacements Benefits Program for new members.

Retroactive Benefit Increases

In the past, when CalSTRS pension benefits were improved, the improvement applied to service that was performed in the past, as well as future service. For all members, future benefit enhancements will only apply to service performed on or after the operative date of the improvement.

Pension Holidays

In the past, with high investment returns ensuring well-funded pension plans, some plans reduced or temporarily ceased contributions into pension plans. The new law prohibits all plans from suspending any employer or employee contributions necessary to fund annual pension costs. Contributions may not be less than the normal cost.

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Next StepsLegislative Changes

CalSTRS is seeking clarification on a number of reform issues outlined in the Pension Reform Act of 2013, including:

y Was it the Legislature’s intent to apply all changes related to establishing contribution rates to CalSTRS, since the board has not had the authority to set contribution rates in the past?

y If employers have agreed to pay for all or a portion of member contributions, can they continue to do so for existing members?

y If employers have agreed to pay for one-year final compensation, can they continue to do so for existing members?

Additionally, CalSTRS is drafting potential clean-up legislation in 2013 to make technical corrections and conforming changes that align the Teachers’ Retirement Law and the changes made in the Pension Reform Act of 2013. The potential clean-up legislation may:

y Expand who is considered a current member to individuals who:

» Were first employed by a public employer to perform service subject to coverage in a concurrent retirement system on or before December 31, 2012.

» Performed creditable service in the concurrent retirement system within the last six months.

y Adjust the cap on creditable compensation every July 1, rather than every January 1.

y Define creditable compensation in the Teachers’ Retirement Law for members subject to the Pension Reform Act of 2013.

Until clean-up legislation is developed, introduced, passed by the Legislature and signed by the Governor, CalSTRS is implementing the Pension Reform Act of 2013 as written.

Employer Advisory Committee

Pension reform was discussed at the Employer Advisory Committee meeting held at CalSTRS Headquarters on November 7, 2012. Additional information regarding pension reform will be discussed at a special EAC meeting to be held at CalSTRS Headquarters on January 9, 2013.

Employer Communications

Within the next few months, CalSTRS will publish e-Bulletins, SEW Announcements, Employer Directives and other reference material regarding issues and the impacts of pension reform on employers and members.

continued on page 14

CalSTRS is seeking clarification on a number of reform issues outlined in the Pension Reform Act of 2013.

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Employer Training

Beginning the last week of November 2012, CalSTRS will provide a series of information sessions regarding pension reform and the impacts it has on employers.

Employer Readiness

Within the next few months, CalSTRS will be implementing changes to the Secure Employer Website. We are anticipating there will be:

y No changes to the current F496 file format.

y New edits added, such as preventing the submission of special compensation for new members.

y Changes to some existing edits, such as allowing for varying contribution rates in the future.

If you have system questions, please contact CalSTRS Business Readiness staff member Bill Frerichs at 916-414-5463 or Renee Yorita at 916-414-5466.

Questions

If you have questions or concerns, please contact your CalSTRS Member Account Services representative.

For more information regarding pension reform, you may view frequently asked questions and other documents on the Pension Reform Impacts on CalSTRS page under the What’s New section on CalSTRS.com.